Posted November 23, 2017 by admin in Politics
 
 

Fitch: Blame Politics For NAFTA Breakdown


Back in September, Nomura Securities noted that NAFTA might be stuck in a face-off between two dueling populists. Fitch Ratings weighed in on Tuesday. Only, they’ve added Canada to the mix. While most of the blame was laid on the shoulders of a rather belligerent Trump team, new political scenarios in Mexico also do not favor NAFTA. Andres Manuel Lopez Obrador, aka AMLO, is as much a fan of NAFTA as his arch-rival to the North, Donald Trump. He is poised to win the presidency next summer. And although he will not have a majority coalition, a chunk of his supporters want out of this decades-old trade deal, too, saying that it has only helped large corporations and hurt small Mexican businesses.

“Ultimately, if negotiations fail and NAFTA ends, it is likely to be politics that is responsible, as each government has infused the talks with homespun political considerations that are largely defensive and intended for domestic audiences,” said James McCormack, Global Head of Sovereign Ratings at Fitch.

In London last week, investors and financial media attending a conference run by Schroders agreed that there was backroom chatter from clients and sources in Mexico that are expecting NAFTA talks to fail. Some are now preparing for it and looking at which sectors will be hardest hit.

“If it fails, you go to the World Trade Organization rules, and that’s not a disaster,” says Vladimir Signorelli, founder of Bretton Woods Research, a macroeconomic investment research firm in Long Valley, NJ. “I think if NAFTA does fail it underscores the vulnerability of all free trade agreements conducted under the chaos of floating exchange rates. Because you can’t have fair and free trade where competitive devaluations persist.”

Most Mexico investors will say that Banxico, the country’s central bank, is as rigid as it comes to playing by the rules of global monetary policy. Still, like all central banks around the world, they have the levers to extract liquidity from the system or add to it. The peso is currently weaker today than it was when Mexico’s biggest market — the United States — was in the midst of its Great Recession in 2008-09.  In February 2009, a month before the lows in the S&P 500 were reached at the hellish intraday figure of 666 on March 6, one dollar was worth around 15 pesos. Today, one dollar will get you 18.78 pesos. The peso is much weaker today than it was when the NAFTA law was signed in 1993. Over the last 10 years, the Mexican peso has weakened as much as against the dollar as the Pakistani rupee, a small frontier market.

The fifth round of NAFTA negotiations wraps up today.

The stated desire of the Trump Administration has been to reduce the U.S. merchandise trade deficit with Mexico and — somehow — return manufacturing jobs to areas hard hit from cheaper alternatives, both in terms of taxation, labor, and environmental regulations. Leaving aside the questions of whether these objectives make economic sense and, if so, whether a trade agreement might realistically achieve them, the U.S. position assumes the economic outcomes of a deal are easily measurable and characterizes the negotiating process as well as any resulting agreement as zero-sum propositions, Fitch analysts wrote in their report titled “Domestic Politics the Biggest Threat to NAFTA.”

See: With Mexico, NAFTA Might Have Two Opposing Populists In 2018 — Forbes

Trump’s NAFTA Trade War May Derail Small Business — CNBC

NAFTA Exit Worse For Mexico — Forbes

It would be impossible using the U.S. benchmarks alone — a reduced trade deficit with Mexico and more U.S. manufacturing jobs — for the Canadians and Mexicans to claim victory in negotiating a better deal for their constituents. One consequent tactic Canada and Mexico might consider is to go “all in” at some point in the negotiations, threatening to walk away unless a more balanced deal can be reached that would allow for a “win-win” outcome, the Fitch report says.

Bloomberg

But it is highly improbable that Canada or Mexico, together or separately, would use the threat of walking away as a means of trying to shift the U.S. toward a more accommodating position.  This is not the sort of politics people are used to, let alone the political press. Is this simply the negotiating style of a team comprised of a private equity kingpin — Commerce Secretary Wilbur Ross — who has made his money buying up distressed assets and President Trump, a man who has spent as much time in a hard hat talking to construction workers as he has on his golf courses carving up real estate with a combination of tactical wisecracks and profit motives.

“The political noise is something you have to pay attention to on NAFTA,” says Tom Wilson, head of emerging market equities at Schroders, a global money manager. “There may be disruption there, for sure, especially when you consider Mexican elections next year.

Fitch thinks it is the U.S. that is most likely to abandon NAFTA.  An obvious precedent was Trump’s immediate withdrawal of Obama’s Trans-Pacific Partnership, something both Trump and Bernie Sanders promised as candidates. Sanders called it a disastrous trade agreement. Sanders also spoke out about NAFTA in 1993, saying what AMLO has said, that it only benefits the “ruling elite” and is a “disaster for working people.”

None of the three countries’ domestic political considerations that are now interwoven with NAFTA renegotiations preclude a mutually beneficial agreement. Combined, however, they will make it much more difficult, according to Fitch’s assessment.

It is debatable whether the additional political constraints on NAFTA negotiators serve national or narrower interests, but the risk of NAFTA being killed is becoming more of a base case scenario today than it was in the early days of the Trump Administration.


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